Investing in the market shouldn’t be a gamble

As CNN Money put it, “After an overnight selloff on election night, the stock market welcomed Trump with a bang as the Dow soared 257 points the day after the election.”1

Eventually, the Dow Jones Industrial Average would surge more than 1,400 points between the election and the end of the year. All told, the U.S. market has gained $1.4 trillion in value since the election, as reflected by the S&P 500 and Dow Jones indices.2

As of May 5, 2017, the S&P closed at 2400. When Trump won the election November 8, 2016 the S&P closed at 2140 and the next day it shot up to 2170. In reality the S&P could have easily gone the other way into negative returns. What is the S&P? The S&P 500 is generally regarded as a gauge of large-cap U.S. equities. The index comprises 500 leading companies and captures approximately 80 percent of available market capitalization.3

What about the risk?

There are other indices, and investors should be familiar with them before investing and use them as a basis of comparison to investments selected. Although you cannot buy an index, you can buy investments that represent the index, and positions that closely mimic a specific index.4

It has been said that investing in the stock market is akin to gambling.

When you gamble, the hope is you can beat the odds and win. And it is well known that the odds favor the casino (or “house”), and each game of chance has different odds. This allows casinos to stay in business.

Of course no one likes to lose, but the probability is at some point you likely will lose a bet and your money.

Here’s the difference: Your loss at a casino is absolute, as there is no ownership. Investing in the market gives you ownership (with bonds) or allows participation in a company (stocks) when purchased. In either case, when do you walk away with your winnings or losses?5

Approaching any investment and participating in the stock and bond markets requires being resolute, objective, and not overly optimistic or greedy. You have to make critical decisions, such as: Will you purchase passive or active investments, equities or fixed-income holdings, and invest for short- or long-term time- frames? Will you buy small-, mid-, or large-cap companies? Should you invest in U.S. or foreign securities?

And should you do your own research or consult with a financial advisor? If the latter, is the advisor a fiduciary or acting in a suitability role?6

What this means for you

How an investor participates in the market will usually determine their positive or negative outcomes. Individuals who try to time the market (buying at the bottom and selling at the top) are often wrong, as research has shown this endeavor is statistically unlikely. It is nearly impossible to accomplish and is more about luck than skill.

Investors who take a concentrated position in one sector or stock are hoping to gain, but they are equally likely to lose. Remember the technology (2001) and real estate bubbles (2006)? Standard deviation (the amount of risk) plays an important factor in returns, which are not always equal on the up versus downside.7

The caveat is also true for those who shy away from any type of investing. The risk of doing nothing other than earning nearly no interest on cash might seem safe, but in reality it exposes one to other risks, e.g., inflation and loss of purchasing power.

Looking at annual rates of return for different asset classes, it is highly unlikely to predict what an asset class will do, but you can accurately determine how a market segment did after the fact. And that analysis reveals that no one class consistently returns results that can be replicated in consecutive years. Hence the expression, “Past performance is not a guarantee of future results.”

Diversify or go all-in?

Buying high and selling low is exactly what you don’t want to do, but it’s often the result of taking an emotional as opposed to an objective approach to investing. Investors who listen to differing (and often incorrect) pundit opinions ultimately make poor decisions and develop a bad taste for the market.

Think of it as purchasing a ticket and getting on a roller coaster; you know the ride has its ups and downs, and it has only one exit when you decide to get off. What are your expectations for each potential return, and can you handle a financial loss?

The concept of “don’t put all your eggs in one basket” is a warning to avoid taking a concentrated asset position, i.e., putting all your money in one or two stocks. A diversified investing approach looks at different asset classes and allocates a percentage to each, thereby spreading out risk across a spectrum of different securities.

A portfolio is built with assets that are not necessarily correlated to each other, so as some assets go up, others are likely to go down. The net result can mitigate risk by exposing an investor to an overall lower degree of risk and greater chance of positive returns.

“The greatest risk is not the volatility of the market but the volatility of your own behavior,” says Daniel Crosby, a behavioral finance expert.”8

Whatever your approach, you need to think, study, set a timeframe, remain objective, and be realistic.

In addition, don’t be afraid to seek guidance by contacting a fiduciary professional, such as a certified financial planner (CFP). You don’t have to fear the market, but have a healthy respect for it by choosing a comfort- able degree of risk and keeping your emotions in check.

H. William (Bill) Wolfson , DC, MPAS(SM), CFP, is a financial consultant and adviser. He is a member of the New York and Florida Chiropractic Associations. He retired after 27 years of chiropractic practice, and can be contacted at 631-486-2792 or drhwwolfson@gmail.com.